Ib economics definition database

Indirect taxes

taxes imposed upon expenditure

Percentage tax

tax is a percentage of selling price

Maximum prices

price ceiling on product to allow increased consumer consumption

Minimum prices

Price floor set to protect producers of industries that are necessary for the economy and minimum wage workers

Dumping

Selling goods abroad at lower price than their market price, harming local producers of the good and the country’s economy. According to the WTO, dumping is illegal.

Quotas

limits governments impose on firms in production

Elasticity

the extent something changes when one of its determinants changes.

Elasticity of demand

How much demand changes when price changes,

Price elasticity of demand

Measure of how much the quantity demanded changes when price changes PED = % change in quantity/ % change price.

Elastic demand

Percentage change in price has a proportionally higher change in quality demanded, PED greater than 1, lower prices lead to made total revenue

Inelastic Demand

Percentage change in price has a proportionally lower percentage change in quantity demanded, PED between 0 and 1, higher prices lead to more total revenue.

Unit Elastic Demand

Percentage change in price has a proportional but opposite change in quantity demanded PED=1.

Total Revenue (TR) Cost of Product X Quantity sold (Demanded).

Determinants of PED

Number and Closeness of substitutes, necessity of product and how widely it is defined, proportion of income spent on the good, time period considered.

Primary Commodities

Raw materials which have inelastic demand.

Manufactured goods

Man-made goods with elastic demand.

Income Elasticity of Demand (YED)

How much quantity demanded changes when there is a change in consumer income. YED = % change in Demand / % change in consumer income.

Income Elastic

Percentage increase in income has proportionally larger percentage change in quantity demanded, YED > 1, typical for luxury goods

Income - Inelastic

Percentage change in income has a proportionally smaller percentage change in quantity demanded. 0<YED,1. Typically for necessities

Negative YED

Increase in income leads to a decrease in quantity demanded.

YED < 0, inferior goods have a negative YED.

Price Elasticity of Supply

how much supply for a product changes when price changes.

The immediate period (the very short run)

the time right after a change in price where a firm can’t change any of its factors of production yet there face supply doesn’t change. At the immediate period PES is perfectly inelastic.

Determinants of PES

Existence of unused capacity, mobility of factors of production, time period considered, ability to store.

Economic Growth

an increase in a country’s gross domestic product over time.

Market Equilibrium

where supply curve and demand curve meet, the point where all that is supplied is demanded , marker in state of allocative.

Equilibrium

A state of rest, self perpetuating in the absence of any out state disturbance.

Market clearing price

the price at which there is no shortage or surplus in supply.

Consumer surplus

extra utility gained by customers who at paying a price lower than what they are prepared to pay.

Producer surplus

Excess of actual earnings that is above what a producer is prepared to sell product for.

Community Surplus

sum of consumer and producer surplus, maximized at market equilibrium.

Marginal Social Cost (MSC) Curve

total cost of producing one unit of a good or service to society, represented by supply curve when costs of industry is equal to costs of society.

Marginal Social Benefit (MSB) Curve

total utility gained by society from consuming one or more units of a good or service, represented by demand curve when cost of industry is to costs of society.

Allocative efficiency

when resources are allocated in the most efficient way in society’s point of view. MSB = MSC

Supply

quantity of a good or service producers are willing and able to supply at different prices in a given time period (effective supply).

Law of Supply

as the price of a product rises, the quantity supplied of the product will usually increase, Ceteris Parabus.

Subsidies

payments made by government to firms that reduce their cost of production.

The Short Run

the period of time where at least one factor of production is fixed all production takes place in the short run.

The Long Run

The period of time where all factors of production are variable but the state of technology is fixed, all planning takes place in the long run.

The law of diminishing returns

in the short run if a firm increases output by adding more and more units to a variable factor, the output of each unit added will eventually fall.

Total Product (TP)

total output a firm produces using its fixed and variable factors.

Average product (AP)

output produced on average by a fixed or variable factor.

Marginal Product (MP)

Extra output produced by using an extra unit from the variable factor.

Marginal Cost(MC)

The increase in the total cost of producing an extra unit of output.

Competitive Supply

Supply when the output of one product limits the output of alternative products.

Primary Sector

industries that produce primary commodities (e.g agriculture)

Secondary (Manufacturing) sector

industries that take primary products and use them to manufacture producer goods (e.g. Clothing, Machinery)

Tertiary (Service) Sector

industries that produce services & intangible products.

Income Effect

price failing causes more real income, aka they can afford larger quantities.

Substitution effect

Ratio of utility to price, when the price decrease they can gain more utility for price.